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AT&T’s pending merger with T-Mobile USA, on government hold since March, was just hit with a sucker punch.

After months of hearings and analysis and thousands of pages of documents submitted by the parties, the Department of Justice yesterday filed a lawsuit to block the merger. With little warning and even less evidence, the DoJ’s complaint reaches the startling conclusion that the merger must be stopped.

“Unless this acquisition is enjoined,” the Obama administration told the court, mobile users “likely will face higher prices, less product variety and innovation, and poor quality services due to reduced incentives to invest.”

The government’s condemnation of the deal is startling for many reasons, all of which should give Silicon Valley executives a pounding headache this morning. Consider just a few:

- AT&T’s willingness to pay a reported $39 billion for T-Mobile makes economic sense only by combining essential spectrum resources, cell towers and other infrastructure of the two companies. Cellular networks work better with more spectrum and more sites—indeed, the improvements are exponential. Given what the FCC admits is a derelict regulatory environment where spectrum has been woefully mismanaged and local municipalities resist efforts by carriers to invest in capital improvements, sometimes for years, mergers are the only way mobile providers can improve service quality.

- AT&T’s goal in completing the transaction is to accelerate deployment of a nationwide 4G LTE network, one that would cover 97% of all U.S. consumers. That would actually increase competition. Today, only Verizon has the spectrum and capital to offer this critical next-generation technology. And LTE, to quote again from the FCC, has the best potential “to make mobile wireless service a more viable competitor” to landline broadband services. Which is to say: the merger would create competition, not eliminate it.

- Last year, the same DoJ cautioned other regulators that the mobile services market is unlikely to ever resemble “a textbook model of perfect competition.” Nor, the agency argued, should it. Yet despite high costs of entry and regulatory limits on spectrum availability and infrastructure investment, new technologies (LTE, satellite, microwave, and higher-frequency communications) and new competitors continue to enter the market all the time. Mobile competition is increasing, not shrinking to a “duopoly.”

LightSquared, for example, has already raised $5 billion to offer satellite-based mobile broadband to 100 million consumers, a network held back only by waffling regulators. And just last week, Dish Network made clear that its planned acquisition of spectrum from TerreStar will allow it to offer a competitive mobile broadband service. As Recon Analytics' Roger Entner notes, “the country's third largest pay-TV provider with more than 14 million customers, [Dish] will be positioned as a formidable provider of a complete telecom offer--Internet, TV and mobile--with greater geographic and population reach than AT&T, CenturyLink, Comcast, Cox, or Verizon.”

- Last but not least, news of Tuesday’s antitrust complaint sent shares of AT&T competitors Sprint and its subsidiary Clearwire surging. But as leading antitrust scholar Joshua D. Wright points out, that is precisely the opposite of how the market ought to have reacted---assuming the DoJ knew what it was doing. The agency’s principal concern, after all, is that the anti-competitive effects of the merger would allow AT&T/T-Mobile and its competitors to raise prices and increase profits. So a serious effort to block it ought to have sent shares of its competitors down, not skyrocketing.

The market understands the reality here. If the merger is blocked, it is AT&T’s competitors, not consumers, who will benefit. Number three provider Sprint, the only member of the so-called “Big Four” to substantially cut its capital investments over the last five years, is too far behind to play in a LTE world. Holding AT&T back for as long as it can makes sense as a strategy for Sprint. But regulators have no business picking winners and losers. Especially when the losers include the consumers they’re supposed to be looking out for.